Real Estate Roundup with Sharon Alva: The long and short of short sales
Like many of my colleagues. I have been doing my best to avoid short sales. And frankly if former clients were not calling asking me about “short saling” (new verb) their properties, I would likely have kept avoiding the dreaded short sale transaction.
For those of you who have been blissfully uninvolved in the woes of the real estate market, “short sales” are transactions where the seller’s proceeds from the sale are not enough to cover the loan or loans that are placed against the property. Also known as being “upside down” on your loan.
With one out of seven households in the United States delinquent on their mortgage or in the foreclosure process, short sales are a big part of the housing market. The transactions are burdened by the need to have lender approval for each step of the way, as they are absorbing a big loss to their bottom line.
In our own area we see a growing number of transactions being short sales or bank owned (REO). Recently short sales have outnumbered REO sales.
|Short Sale Actives||14||10%|
|Short Sale Actives||77||34.1%|
|Short Sale Actives||593||26%|
|Short Sale Actives||10||7%|
(Based on listings in the MLS as of July 29, 2010)
As property values dropped and owners lost jobs or hit other life hardships, they turned to their lenders and asked them to forgive equity, reduce the interest rates on their loans and extend their loans. Failing a renegotiated loan, property owners could either have the bank foreclose on the property or get their lender’s approval to do a short sale.
There are pluses and minuses to each approach.
Short sales became notorious for taking long and exposing property owners to even more problems. The lender could pursue the owner for a deficiency judgment after the sale of the property, and what about state and federal taxation of the forgiven debt, which can be seen as income?
The foreclosure process leaves owners with a decimated credit score and the danger of that damaged credit score affecting more than their borrowing ability. The foreclosure tag follows people for many years and can affect security clearance, job attainment or even job retention. Unbeknownst to many property owners, foreclosures carry the some of the same risks as short sales when it comes to deficiency judgments and taxation.
When the financial crisis started, banks has no clear process for handling sales of properties that were short. Real estate agents have been doing their best to navigate what have been murky waters, but sales would languish for months and months (some for well over a year) and agents often felt they could not advocate for their clients as we do in regular sales. We refer our selling clients to real estate attorneys and CPAs, and warn our buyers to steer clear of short sales.
But the number of short sales has grown, even in areas that were thought to be recession-proof when we started spiraling down. The banks have developed better systems to deal with short sales. The government has stepped in with a series of programs that encourages short sales over “walking away” with a foreclosure or deed in lieu. The process remains complex and home owners who find themselves upside down on their loans need to navigate the various risks in tax liability, deficiency judgments, and the effects of any outcome on their credit score, employment prospects and other effects of the financial situation.
Finally, there is rigorous training for real estate agents in managing short sales. While the process of selling a property that will not cover its own debt is much like selling any other property, there are aspects of the transaction that need special treatment. So while a traditional transaction is still preferable, I can say that I no longer run away from short sales. In fact the opportunity to help people in a crisis time is a wonderful aspect of being a real estate agent.
So should you consider a short sale?
The best candidate is someone who has a real need to short sale. Proving hardship is the key to getting the bank to approve. The loss in value of the property is not in itself a hardship as far as lenders are concerned. Loss of income, divorce, illness and other life-altering events are seen as legitimate reasons why an owner can no longer hold on to a property.
The type of loan one holds against the property is also key. California is a no-deficiency state and lenders cannot go after sellers after a short sale … or can they? There are always caveats. Having refinanced jeopardizes that no-deficiency status. Lines of credit that were used for something other than improving the home are also not covered. There are many variables to consider.
The short sale process can be exhausting and will require working closely with your agent to create a package that clearly outlines your financial situation and the property’s market position. A well-crafted package can mean a short sale process that is not too lengthy and leaves you, the seller, with no outstanding debt. The government’s new HAFA program even allows sellers to leave the closing with some cash. The transaction needs to qualify for the program and lender participation is voluntary.
Buyers, in particular investment buyers, are also finding that the banks have developed a process – one that may make it harder to find that “great deal.” Banks are looking to take as small a loss as possible, of course. This means they expect to see something close to market value on the sale of the property. If a property is seriously undervalued in the MLS, the buyer’s agent will want to investigate and make sure the sale is being managed by someone who understands the short sale process. Buyers have been wasting time with deals that will never close for some time. It is time for a better process.
Ask your real estate agent to really explain the short sale process whether you are buying or selling, and make sure they have the knowledge to represent you.
Sharon Alva is a real estate agent with Alain Pinel Realtors, living in Alameda. You can reach her at email@example.com.